As a business owner, selling property is a common occurrence, and the IRS requires the reporting of any gain realized from such sales. To accomplish this, businesses need to file IRS Form 4797, Sales of Business Property, along with their annual tax return. In this blog post, we’ll provide insights into the best practices for reporting the sale of business property and a comprehensive guide on completing Form 4797.
The following are some of the key aspects that we’ll discuss in this post:
Who should use IRS Form 4797 and why is it important?
Choosing between Schedule D or Form 4797
Information needed to complete Form 4797
How to file Form 4797
By the end of this post, you should have a better understanding of what’s involved in reporting the sale of business property and the role of Form 4797 in the process. Let's get started.
Who Should Use IRS Form 4797 and Why is it Important?
As a business owner who owns property within your business, it's inevitable that you will need to use the IRS Form 4797 at some point. This form is used to report any gains made during the sale of business property. For example, if you own a rental property that generates income, it qualifies as business property. Therefore, when you sell this property at a gain, you'll report that gain on Form 4797. However, it's important to note that business owners also use this form to report the sale of business property that results in a loss. For instance, if your plumbing business owns a fleet of vans used to make service calls and you sell one of these vans at a loss, you'll also report that loss on the form. The type of property and duration of ownership will dictate how the IRS treats these losses.
The IRS states that you should use your Form 4797 to report a wide range of property dispositions, including the sale or exchange of property, the involuntary conversion of property and capital assets, the disposition of non-capital assets, and the disposition of capital assets not reported on Schedule D. In addition, the form is used to report the gain or loss for partners and S corporation shareholders from certain section 179 property dispositions by partnerships and S corporations. The form is also used for the computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less. Lastly, if you are a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f), the form is used to report gains or losses treated as ordinary gains or losses.
As you can see, Form 4797 is a critical IRS form that businesses need to understand and use properly. Tracking business property sale income is also important for tax reporting purposes. It's recommended that you keep detailed records of all property sales and purchases, including the purchase price, sale price, and any improvements or renovations made to the property. This information will be used to calculate the gain or loss on the sale of the property, which will then be reported on Form 4797.
Choosing Between Schedule D or Form 4797
The IRS requires business owners to use Form 4797 to report the disposition of capital assets not reported on Schedule D. The question then becomes: when should you use Schedule D instead of Form 4797?
The key difference between these two forms is that Schedule D is used to report the sale of property used for personal purposes, while Form 4797 is used to report the sale of property used in a business capacity. Capital assets commonly used for personal use include homes, cars, artwork, collectibles, stocks, and bonds. If you sell any of these items for a gain, you should report the capital gain on Schedule D. Note that losses on the sale of personal-use capital assets are not deductible, so you do not need to report those losses.
On the other hand, if your business owns industrial equipment and you sell it, you will report the gain on your 4797 form because the equipment was used in your business. Even if you realized a loss on the sale, you would still report it on Form 4797 because business losses are deductible.
Let's consider another scenario: you own a duplex and live in one unit while renting out the other to a tenant. In this case, the capital asset serves both a business and personal use purpose. When you sell this property, you will need to allocate the gains between both Schedule D and Form 4797.
It's important to note that whether you use Schedule D or Form 4797, you must report all gains on the sale of property. Failure to do so can result in penalties and interest charged by the IRS.
Information Needed to Complete Form 4797
Similar to other tax forms, you will require basic information about your business to complete Form 4797, such as the business name and taxpayer ID. However, for reporting the sale of business property, you will need additional information.
Description of the property sold
Original purchase date of the property
Sale or transfer date
Cost of purchase plus any capital improvements
Gross sales price
It is helpful from an organizational perspective to maintain information on each capital asset used in your business. Rather than gathering the necessary information when you sell, keep a spreadsheet or other form that continuously tracks this information. This method makes it easier to report the sale of property as you can simply refer to your tracker instead of having to search through your records for the required information.
How to File Form 4797
Part I of Form 4797 is where business owners report the majority of property held for more than a year, specifically for sales or exchanges of property used in a trade or business and involuntary conversions from other than casualty or theft. However, depending on your specific circumstances, you may also need to fill out the subsequent three sections. Once completed, the form can be filed with your annual tax return and attached to your personal or corporate tax return, depending on your business structure. It's worth noting that although the idea behind Form 4797 is straightforward, the form itself can appear complicated. If you need help filling it out, P3 Accounting can provide assistance. Contact us today.
As a business owner, you are likely to use some form of property in your everyday business activities. When you eventually sell that property, you must report the sale to the IRS using Form 4797. The tax consequences of the gains and losses from the sale of your property will vary depending on how long you have held the property.
Although understanding the tax implications of property sales can be perplexing, tax planning shouldn't be a daunting task for small business owners. At P3 Accounting, we specialize in commercial real estate taxes for businesses and can assist you in creating a tax planning strategy. Contact P3 Accounting today to set up a session.